Directors Counsel

In Directors’ Counsel over the years I have commented on the significance of shareholder rights pursuant to the operation of statutory provisions such as section 232 of the Corporations Act 2001 (Cth) – the oppression remedy. Justice Yates, in the recent Federal Court of Australia decision in Wilmar (Wilmar Sugar Australia Limited v Queensland Sugar Limited, in the matter of Queensland Sugar Limited [2016] FCA 20) illustrates the effectiveness of the remedy in considering significant amendments to the rules governing the sugar industry.

The plaintiff, Wilmar Sugar Australia Limited, a shareholder in Queensland Sugar Limited, sued that company, which effectively controlled the marketing of sugar grown by Queensland farmers. They argued it had acted oppressively, under proposed amendments to Queensland Sugar’s constitution (the articles of association). Wilmar, and certain other sugar growers who owned shares in Queensland Sugar, had their rights to appoint directors and participate effectively in the management of Queensland Sugar significantly reduced by the proposed changes.

A new supply agreement was expected to be entered into between Wilmar and Queensland Sugar, and Wilmar feared it would have no right to have a say (in contrast to the previous position) in the appointment of appropriate directors. Wilmar further argued other amendments constituted oppressive conduct or conduct that is unfairly prejudicial to, or unfairly discriminatory against, Wilmar in its capacity as a member of Queensland Sugar.

In contrast, Queensland Sugar argued the amendments did not diminish the rights of Wilmar to participate in management issues. The defendant further argued that, under the changed circumstances surrounding the regulation of the Australian sugar industry and the marketing of sugar, the competitive environment in the sugar industry had changed. The defendant’s board was planning how to conduct business in the new competitive environment, including how to compete with the plaintiff and the other mill owner members who had given notice of termination. Further, directors appointed to the board by Wilmar would potentially face a fundamental conflict of interest in the discharge of their duties (see paragraph 68 of the judgment).

There was a further fundamental factual issue that arose. The defendant company argued the right to appoint directors would not be removed by the relevant changes to the constitution. But even if that was not the case, the changes being made were not unfair in the context of the new regulatory environment.

The fact the plaintiff had not sought to appoint directors previously to the board did not mean it would not wish to do so in the future.

The basic question for consideration by Justice Yates was whether amendments to the constitution (the articles of association), especially impacting the voting rights of the members, would amount to oppressive, unfairly, prejudicial or discriminatory conduct. In his view this required an objective determination of whether the particular conduct was in fact oppressive, unfairly prejudicial or unfairly discriminatory. He noted oppressive conduct could still be held to exist even if the person effecting the conduct thought it was acting appropriately (he referred to the decision of the High Court of Australia in Campbell v Back Office Investments Pty Limited (2009) 238 CLR 304 at paragraph 176 of that judgment. See paragraph 91 of the current decision).

Queensland Sugar further relied on cases where members of companies that had been excluded from participation, or had their shares purchased against their will, failed in establishing oppressive conduct. The Victorian Court of Appeal decision in Joint v Stephens [2008] VSCA 210 at paras [133 – 134] suggested such conduct may not be regarded as oppressive in every case. Queensland Sugar argued the Victorian Court had relied on a commercial assessment of the relevant matters by balancing the competing considerations between the parties. Even if it appeared the relevant action might be slightly unfair this would not necessarily be the conclusion in the case.

Queensland Sugar further relied on Sidebottom v Kershaw, Lees and Co Limited [1920] 1 Ch 154 to support the proposition that the amendment of a company’s constitution, that is, the articles of association, in a way that would force members to transfer their shares to the other shareholders in the company, where competition issues were involved, might not be unfair. Justice Yates quoted at some length from the statement of principle relied on by Lord Sterndale in that case to support aggressive action taken by the company in neutralising the position of a shareholder in the company whose interests were at odds with company’s interests. Furthermore Justice Yates noted Bundaberg Sugar Limited v Isis Central Sugar Mill Company Limited [2007] 2 Qd R214, where Justice Chesterman upheld amendments to the articles of association which allowed the company to purchase a shareholder’s shares where competition concerns arose in the shareholder remaining a member of the company, provided appropriate compensation was paid.

Despite these decisions, which seemed to favour a decision in support of the arguments put by Queensland Sugar, Justice Yates ruled that in this case the situation was significantly different. Very important changes were being made to the way the sugar industry was being conducted and regulated. In his view, Wilmar and the other shareholders remained bound, for some time, indeed obliged, to supply 100 per cent of their raw sugar for export to Queensland Sugar. Their economic interests in the “defendant marketing that sugar for the best economic return is no less now than it was in respect of its raw sugar supply in previous years” (at paragraph 120). It was very much in Wilmar’s interest to ensure the way the defendant conducted its affairs was aligned to its interests as well as to its shareholders.

Justice Yates added that while competition was at the heart of its move to change the constitution it did not give appropriate acknowledgement to the fact competition already existed. The fact the plaintiff had not sought to appoint directors previously to the board did not mean it would not wish to do so in the future. The defendant’s directors, and those aligned to its own interests, could continue and may very well continue to have a very significant commercial involvement in the way the market operated, and the way the defendant acted as the agent for the producers of sugar. It was clear the competitive environment would be changed as a result of the changed circumstances, but as noted by Justice Yates “those changes are not new, they were evident from the middle of 2014. Even though the competitive environment changed at that time, I am satisfied that, when considered objectively in the eyes of a commercial by-stander having regard to the matters I have discussed … [the previous amendments to the relevant articles] are such that reasonable members would not have thought the amendments to be fair. Indeed, objectively assessed, reasonable members would regard them as unfair” (at paragraph 126). Under these circumstances the judge was satisfied the relevant amendments were oppressive and that they breached section 232(e) of the Act.

The defendant's board was planning how to conduct business in the new competitive environment.

This decision is likely to be taken on appeal because of the differences of opinion between the parties and because of the significance of the sugar industry at the current time where questions of competition regulation and related matters, as well as the interests of foreign investors wishing to acquire Australian companies, is very much up for debate.

Competition issues

The Queensland Government may wish to control competition in the sugar industry against the policy of the Harper Report which the federal government supports in principle.

However, state governments do have the ability to exclude the reach of the Competition and Consumer Act 2010 (CCA) in special cases but must follow the procedures set out in section 51 of the CCA.

It will be interesting to see what attitude the ACCC takes to any attempt by the Queensland Government to continue to minimise the application of competition principles to the sugar industry in that state. Should the Queensland Government enact legislation that overrides the application of corporate law principles, there will be an interesting question for the High Court of Australia to decide on if a challenge is brought to that legislation.

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